Business columnist

GROCERY wholesaler Metcash ticked all the wrong boxes yesterday. It delivered a full-year profit that was below expectations, it announced plans to buy a non-core business and it decided to raise capital in a shabby equities market.

To make matters worse, Metcash is also feeling the increased financial heat from legacy deals - having to write off loans and investments in supermarket retail joint ventures.

This is a company in the middle of an exercise in reinvention. But it's a process that is being undertaken in a very difficult environment.

In the midst of all this the company's chief executive, Andrew Reitzer, needs to explain why his $215 million acquisition of Franklins is taking longer than expected to gain traction and reap the promised returns.

Investors would be justified in questioning whether Metcash overpaid for what is essentially an investment in creating a monopoly in the supply of wholesale groceries to independent retailers - particularly at a time when the smaller-corner-shop end of the market is disappearing.

But it is not just the smaller players that are under pressure.

The independent stores that Metcash supplies have been caught in the crossfire between two large supermarket chains - Coles and Woolworths - that have been engaged in a price discounting war. This is what is eating at the margins of all grocery retailers. It is the underlying problem that is behind Metcash's problematic earnings. How Metcash deals with these structural/competitive issues is now being judged.

The most immediate concern from the market's perspective is the discounted rights issue it announced yesterday. On the surface the discount to the prevailing price doesn't look all that significant - about 7.5 per cent. But those that participate in the issue are eligible for this year's 16¢ dividend.

Factor this into the equation and the true issue price is $3.30 - a much more significant discount. But if one also takes into account Metcash's price a few weeks ago of $4.06 (before it issued a profit warning) the discount looks steeper again - more than 18 per cent.

The good news is that in offering this level of discount, most existing investors will be disinclined to miss the opportunity to take their entitlement.

But analysts are understandably wondering why Metcash did not draw down on its existing borrowing facility, estimated to be $325 to $370 million, of which to date only $180 million has been deployed.

To date, the list of companies that have tapped into the market to raise cash have done so with their backs against the wall having unsuccessfully tried to sell assets or whose businesses are in cyclical decline and need a capital buffer. Metcash said its decision to raise equity rather than utilise debt was based on its desire to be conservative around funding.

Others analysts have queried why the company has (they believe) used debt to fund the company's dividend.

Analysts have also raised a question over the company's decision to include retail sales from its Franklins stores in the revenue numbers from wholesale sales. They take the view that without this boost the wholesale revenue numbers would have been negative in the 2012 financial year.

So there is understandable concern about the future performance of the company's wholesale supermarkets division.

To be fair, as these retail Franklins retail operations are sold to independent operators that will use Metcash as a wholesale supplier, its wholesale performance will improve .

The value in the Metcash model is all about being a monopoly supplier. This is the reason it paid $215 million to buy Franklins - more than twice the nearest rival offer. It will take time for this value to flow through to Metcash's earnings. Legal action by the competition regulator set this back by a year and during this time the performance of the Franklins retail stores declined.

As Metcash's newly acquired supermarkets are onsold to independent retail operators there is evidence the new owners have achieved a better performance. But progress has been slower than investors would like.

Metcash has decided to speed up the process of investing in non-grocery areas. Some worry that boosting funds applied to hardware or getting into the automotive parts business has risks.

But using its logistics skills across a range of different products is probably not such a bad idea. Metcash will buy 75 per cent of Automotive Brands Group - the largest privately owned distributor in the automotive parts and aftermarket sector.

The company can take some of the excess storage capacity from its Mitre 10 distribution centres. In doing so Metcash is consolidating its core competence as a supply chain logistics operator. Of the money raised, $70 million to $80 million is to be allocated to its new distribution centre and about $90 million will be deployed in bolt-on acquisitions that will be centred on buying fresh produce wholesalers.